1-0 to firms but HMRC will be back

Matt Byrne

When HM Revenue & Customs unveiled its plans to overhaul the tax treatment of LLP members and, in the process, help Chancellor George Osborne push through his “largest ever” package of measures aimed at clamping down on tax avoidance and evasion, the UK’s top law firms inadvertently landed squarely in the taxman’s sights.

In its bid to achieve a projected revenue rise of around £3bn, HMRC left many UK firms scrambling to comply with the new rules within a three-month window. Rarely has there been so much confusion in such a short period of time.

Last month we decided to see if we could pinpoint how widely HMRC’s new rules, primarily aimed at tapping the pockets of hedge funds, are being felt and implemented by law firms. We wanted some statistical evidence to back up the anecdotal assumption that most firms are plumping for the route of failing HMRC’s Condition C by injecting new capital from their fixed-share members.

The results are astonishing. Ninety-five per cent of respondents say they are considering implementing changes of some sort, while 64 per cent say they will be asking their fixed-share members to contribute more capital. With the 6 April deadline now passed, many have already done just that.

Our research, published today (see Cover Story, page 8), does not claim to be exhaustive. Many of the UK’s best-known firms do not feature. But the 39 respondents do include some of the largest firms in the market as well as several with fewer than 10 partners.

Couple this data with the table on page 12, which highlights the actions several of the UK’s biggest firms, including Hogan Lovells, Eversheds and CMS Cameron McKenna, have taken to comply with the new rules, and a clear and representative picture emerges.

As expected, most firms have decided to fail Condition C. One way of interpreting this is that, despite the tight timeframe, HMRC merely succeeded in setting some of the UK’s best brains a challenge they rose to and met in spades. In the process, they generated an unlooked-for windfall for several firms, while the Revenue is likely to be millions off its £3bn target.

It must be odds-on that HMRC will decide to come back for another go, further down the line. It is unlikely that this puzzle was definitively solved on 6 April.